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Editorial: Handshakes and high stakes

Editorial: Handshakes and high stakes

When I first heard KH Distribution had been sold to Simms International (see page 1 of the August 30 edition of ARN), my first thought was that it had slipped under the Cellnet radar. It seemed like a missed opportunity for the Brisbane-based powerhouse to add substantially to its list of Apple dealers by picking up the customer list of a close neighbour.

But Cellnet managing director, Adam Davenport, dismissed this suggestion because he is not interested in spending the distributor's acquisition fund in its home state. It seems anybody looking to sell out in Queensland, and there must be a few, will have to look elsewhere for prospective buyers. Simms has not revealed financial terms of its KH acquisition, which is the normal practice in these consolidation deals. The stark reality is that the vast majority of IT distribution businesses aren't worth a great deal.

It is sad to see KH exiting the market and difficult not to think it has been a victim of its own, or at least iPod's, success. The company has been an Apple specialist for a decade and built a loyal customer base among the design community that more recent entrants to the Mac market like Cellnet and Express Online found tough to crack.

But the launch of iPod saw a well established business have its model dramatically changed. Within a couple of years, the world's favourite portable music player was suddenly accounting for more than half of KH revenues. While they may walk off the shelves almost of their own accord, anybody who carries iPods will tell you they offer margins that make a basic PC look like a Cisco IP telephony solution. They are a nice revenue booster but Steve Jobs is the only person in the world who will ever enjoy a healthy retirement on the back of selling them.

Managing growth quickly became an issue for KH. When the offer of a golden handshake was put on the table, Keith Rice understandably decided to grab it.

In other news this week, distributors remain divided on the merits of taking out third-party insurance to cover bad debt (see page 1 of the August 30 edition of ARN). The general consensus seems to be that there is no need for smaller operations but that major players with thousands of dealers on the books should.

Of course, there is always an exception that proves the rule and in this industry that company is Synnex. It stashes a small percentage of all sales under the mattress to protect it against mishaps and claims to be well ahead over the years.

No matter what industry you ply your trade in, it isn't too difficult to see the attraction of avoiding insurance companies. That is particularly true in the IT industry where margin pressure is leading inevitably to market consolidation. Not only does increased risk mean higher premiums, but trying to get a claim paid out is often like squeezing blood from a stone.

Insurers would also be nervous about a company extending credit to huge numbers of smaller customers in the current climate, which could go some way to explaining the Synnex do-it-yourself policy.


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